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Setting New Milestones: Local Banks Report Record Earnings In The Midst Of A Stagnant Economy

Well positioned, well managed, and with plenty of resources to supply demand, island banks are stronger and healthier than ever


September 6, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Holding their own: Local banks report record earnings in the midst of a stagnant economy

What economic slowdown? Defying a lingeringly sluggish economy, local banks are setting new milestones as they report record earnings during the first half of the year.

Puerto Rico’s largest financial institutions have reported record second quarter (2Q) net income increases, ranging from 20% to 50%, at a time when Wall Street and Main Street are feeling the pinch of a weakened economy.

Local banks are not only making more money; they are also growing bigger. So far this year they have posted significant increases in assets, deposits and loan portfolios.

According to statistics from the Puerto Rico Bankers Association (PRBA), assets from local banks as of 1Q 2001 reached $53.8 billion–a 10.24% increase over 1Q 2000’s $48.8 billion.

Deposits have also increased during the first three months of this year when compared to last. As of March 31, 2001 (first quarter), total deposits at local banks (both private–with 94.3% of total–and government) amounted to $36.8 billion–a 10.3% increase over 1Q 2000’s $33.4 billion.

Local banks’ loan portfolios have increased during the same period as well. Total loan production during 1Q 2001 reached $25.2 billion as compared to 1Q 2000’s $23.6 billion–a 7% increase.

The remarkable performance of the local banking industry is not limited to this year. Growth has been consistent, in all aspects, for the past seven years.

According to PRBA records, combined assets from local banks, at the end of last year, amounted to $54.3 billion, compared to $28.9 billion in 1994–a 87.5% increase.

Deposits during the same period grew 49%, from $21.4 billion at the end of 1994 to $31.9 last year.

Loan portfolios increased a whopping 79.26% from $16.4 billion in 4Q 1994 to $29.4 billion as of 4Q 2000.

Interestingly, local banks have been able to achieve these impressive results despite a decline in the number of players in the industry. In 1994, there were 23 banks in the PRBA roster, whereas the number in 2001 has come down to 15.

Since 1995, seven banks have either consolidated, been acquired by other financial institutions, or have exited the market. Only one new bank has entered the local scene, Hamilton Bank in 1998.

The wave of bank consolidations of the 80s and 90s is virtually gone, although some acquisitions between small and medium-size banks are expected to happen, as it is the only way these banks will be able to survive and compete with larger, more powerful ones.

Industry consensus is that no new outside players are expected to enter the island for now, as the market remains very competitive. On the other hand, local banks’ entrance into the insurance business is expected to benefit the banking industry as well as its customers.

A well positioned industry

According to PRBA Executive Vice President Arturo Carrion, the strong performance by local financial institutions would not be possible if the industry wasn’t well positioned and managed.

"None of this could happen if the local banking industry was not well positioned. It has good management, and the resources to meet the demand," Carrion told CARIBBEAN BUSINESS. "The fact is, we in the banking industry do not create demand, we finance it."

PRBA is a not-for-profit organization that represents Puerto Rico’s commercial banks’ interests at governmental, legislative, and executive forums, as well as to the island’s social and economic community.

Another significant factor for the local banking industry’s success, according to Carrion, is its portfolio size.

"As of December 2000, the island’s financial system had $116 billion in assets, of which 40.6% belonged to commercial banks and 38% to international banking entities (IBEs)," said Carrion. "The rest is divided among cooperatives, consumer loan institutions, and brokers."

IBEs are tax-exempt financial institutions, chartered under federal and local laws, that are allowed to capture and hold deposits for reimbursement in the U.S. but are limited in the range of banking activities they may conduct locally (e.g., certain financing of government projects deemed essential to Puerto Rico’s economic development). Many IBEs are subsidiaries of banks already operating in Puerto Rico.

According to PRBA estimates, local commercial banks had $47.2 billion in their portfolios as of Dec. 30, 2000–a significant amount by any standard.

"With $31.3 billion in total deposits as of March 31, 2001 and $29.5 billion in total loans, that gives a loan to deposit ratio of 93.9%, which is high," explained Carrion. "What that means is that the local banking industry is very aggressive, practically lending everything it has. We are contributing to the island’s economy in a very extraordinary way."

Another factor for the banks’ excellent performance is their increased use of technology.

"Banks have become more technologically advanced, providing a wide range of services, extending service hours, and introducing new products such as electronic banking and debit cards," said Doral Financial Corp. Chairman & CEO Salomon Levis. "The population is more educated, therefore more demanding."

There are more than 1,000 Automated Teller Machines (ATMs) and over 34,000 Point of Sale (POS) terminals on the island, and their use has skyrocketed since last year’s introduction of the Family Card, the government’s electronic debit card used for the Nutritional Assistance Program (PAN)–which replaced the food coupon program.

During November 2000, there were 12 million or $5.7 million in transactions made over the island’s ATMs and 424,000 electronic debit transactions–including 28,000 transactions using the Family Card.

New services are continuously added and existing ones improved as competition between local banks intensifies. Practically all major banks in Puerto Rico now offer Internet or online banking.

But how much room is there for growth? According to industry estimates, nearly 50% of the island’s population does not have a checking account. With such potential for growth, banks (especially small and medium-size) will continue to add more branches.

Currently there are 544 combined commercial bank branches in Puerto Rico, and more are in the pipeline.

Drop in interest rates benefits banks

The Federal Reserve has cut interest rates seven times so far this year, for a total of 300 basis points–a move to ease credit, promote economic activity and prevent the economy from dipping into a recession–becoming one of the main catalysts for the local banks’ better than expected performance during the first half of this year.

"The drop in interest rates has benefited banks by expanding profit margins, reducing cost of funds, and increasing net income growth, thus achieving improved results," said PRBA President and Banco Popular Senior Executive Vice President David Chaffey. "The effect has been a very positive one for local financial institutions."

The consensus among the local banking industry is that the Federal Reserve will reduce interest rates even more, meaning banks and their customers will continue to benefit from low interest rates for a while.

"There’s no question that the banks’ performance in the past few months is the result of a significant drop in interest rates, which reduces the cost of funds," said Jose E. Fernandez, president and CEO of Oriental Financial Group Inc. "Oriental’s cost of funds in October of last year was 6.75%. Now it’s 4%. That’s a lot of money saved."

Another plus from the drop in interest rates is that as long as local banks and financial institutions continue to improve earnings and reduce costs, their stock prices will remain high–which makes local bank stocks very attractive for island as well as stateside investors during the current volatile stock market.

Stock prices of local financial institutions increased between 51.89% (Oriental) and 188.62% (Doral) when compared on a year-to-year basis.

The top local banks

With 200 branches islandwide, Banco Popular remains the undisputed leader among local banks, enjoying 32.3%, 28.3%, and 31.6% market share in deposits, loans, and assets, respectively, as of March 31, 2001. As of that date, Puerto Rico’s largest bank reported $10.1 billion in deposits, $8.1 billion in loans, and $16.9 billion in assets.

Santander of Puerto Rico reported $3.8 billion in deposits, $4.4 billion in loans, and $7.2 billion in assets for 1Q 2001. Santander’s local market share for the period was 12.3%, 15.5%, and 13.5%, respectively. Santander has 76 branches on the island.

As of March 31, 2001, FirstBank–with 45 branches–had $3.5 billion in deposits, $3.6 billion in loans, and $6.1 billion in assets. FirstBank’s local market share during the said period was 11.3%, 12.5%, and 11.5%, respectively.

Westernbank reported $2.6 billion in deposits, $1.7 billion in loans, and $4.6 billion in assets during the first quarter of 2001. The bank’s market share for the said period was 8.6%, 6.1% and 8.7% respectively, with 35 branches islandwide.

With 24 branches, R-G Premier Bank of Puerto Rico had $1.7 billion in deposits, $1.7 billion in loans, and $2.9 billion in assets as of March 31, 2001. The bank had corresponding market shares for the period of 5.6%, 6.1%, and 5.5% respectively.

Doral Bank–which started local operations in 1993 and now has 27 branches–reported $1.2 billion in deposits, $1.4 billion in loans, and $2.7 billion in assets for 1Q 2001, enjoying market shares of 4.1%, 4.9%, and 5.2%, respectively.

For the period ended March 31, 2001, Oriental Financial Group (20 branches) had $689 million in deposits, $431 million in loans, and $1.8 billion in assets, achieving a local market share of 2.2%, 1.5%, and 3.5%, respectively.

Deposits portfolio

During the first quarter of 2001, the area experiencing the greatest growth among local banks was the deposits portfolio.

Total deposits portfolios from local banks amounted to $31.3 billion as of March 31 (1Q) 2001, a 46.26% increase over 4Q 1994’s $21.4 billion and a 7.19% increase over March 31, 2000’s $29.2 billion.

Deposit demand from individuals and corporations, individual retirement accounts (IRAs), Keogh plans, notes on withdrawal (NOW) accounts, and brokered accounts show increases when compared to year-to-year totals.

Deposits from Section 936 funds and government institutions are the only types showing a decline on a year-to-year basis.

Brokered deposits, which amounted to $4.5 billion in 1Q 2001, are starting to replace Section 936 deposits, according to Carrion. These experienced a 53.79% increase over 1Q 2000’s $2.9 billion.

Loans portfolio

Another area that has experienced significant growth among local banks is the loans portfolio, especially construction.

Total loans portfolios from local banks amounted to $29.4 billion as of 4Q 2000–a huge 80.36% increase over 1994’s $16.3 billion. Total loans as of March 31 (1Q) 2001 reached $28.9 billion.

As of 1Q 2001, construction loans reached $2.05 billion or 7% of the total loan portfolio–a 23.5% increase over 1Q 2000’s $1.66 billion.

Commercial & industrial loans, conventional mortgage, Farmers Home Administration (FHA), and Veterans Administration (VA) loans experienced increases on a year-to-year basis.

VA loans amounted to $46 million during 1Q 2001, boasting a 53.33% increase over 1Q 2000’s $30 million.

Auto and credit card loans, as well as personal loans from consumer loan institutions or financieras experienced decreases when compared on a year-to-year basis.

Financieras reported $2.4 billion worth of loans for 1Q 2001–a 7.69% decrease over 1Q 2000’s $2.6 billion.

Industry sources blame the decreases in these loan segments to market saturation, especially in auto loans. Additionally, institutions have tightened their credit policies as a protection against loan defaults during the current economic slowdown.

This Caribbean Business article appears courtesy of Casiano Communications.
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